For the U.S., where corporate funds made an estimated investment return of about 14%, pension plans also struggled with their funding levels.
By Wilshire Consulting's measures, U.S. corporate plans on average came into 2020 funded at about 87%, dropping to around 80% at the height of the crisis in the first quarter. However, they were pretty much back up to around 87% by the end of the year, said Steven J. Foresti, Santa Monica, Calif.-based CIO and managing director.
Mr. Foresti said public plans ended 2019 about 74.8% funded, dropped to about 63% at the height of the pandemic — "a huge drop-off" — before recovering back and even improving to about 78.5% at the end of 2020.
Trading in credit was tough in particular and transacting was difficult and costly. "The order of the day in March and April was trying to manage rebalancing against that illiquidity and the cost of it," Mr. Foresti said. "It's a lot easier to say than to actually execute, and all these behavioral biases and risks come into play when you're buying something that's just fallen off the table and the future is uncertain. But to the credit of almost all our clients, they stuck to the plan" and rebalanced where needed.
The future, however, is less rosy. The main driver of the market recovery was government and central bank stimulus "in terms of trying to fill in the economic hole that was created," which lifted markets. But "we're now at a point where (we're) in a forward-looking environment, and you could argue we've pulled some of the returns forward," Mr. Foresti said. There are "very muted expectations" looking at what returns can give, even further up the risk curve. "While funding levels improved, I think the road ahead will be quite challenging," he said.
Employer contributions going forward "is another challenge. Depending on what pocket of the market you're in, the economic slowdown (and other elements) create some problems in terms of budgets" for the sponsoring employers.
There's been a "huge divergence" in the impact of the pandemic on corporations, which in turn "has a huge impact on the strength of the sponsor to make contributions. It's hard to make a high-level statement, but it obviously puts more stress on companies that find themselves in more impacted parts of the economy," Mr. Foresti said. "I imagine a pension sponsor that's an airline is probably having a very different conversation than a sponsor in the middle of the technology sector, making products or services that are making work-from-home life easier."